The Thai economy was traditionally based on agricultural exports and is the leading exporter of rice globally, along with other export products such as fishery products, tapioca, rubber, grain, and sugar.
Since the 1980s Thailand has been one of the most successful of the Asian "tiger" economies, transforming into a regional manufacturing base. It has benefited from strong foreign direct investment (FDI), primarily in the electronics and automotive manufacturing sectors. This has mainly come from Japan and Korean companies, which sought to offshore processes to Thailand to take advantage of the cheap labour in a stable political environment and low exposure to natural catastrophes.
This external dependency has proved a source of extreme volatility, as evidenced by a 10% GDP contraction in the 1998 Asian financial crisis, but also dramatic growth, with investment inflows stimulating rapid post shock recoveries.
According to a recent study by the Economist Intelligence Unit, in the period between 2004 and 2009, Thailand received 17% of the total FDI inflows to Southeast Asia. By 2006, the Thai economy was one of the success stories of the region. FDI funded industry in the automotive and electronics sectors contributed strongly to this and now account for 20% of GDP.
In 2006, the political stability Thailand had enjoyed was interrupted as the Thai military staged a coup to overthrow the Prime Minister Thaksin Shinawatra. Since then there has been a period of political unrest as various factions jockeyed for power. While international business interests were not significantly disturbed, and since an election in 2011 there has been some stability, one of the key attractions of Thailand as an investment destination has been called into question.
In 2009, Thailand, as an export economy, was significantly impacted by the global financial crisis, with a GDP contraction driven by reduced export demand.
More dramatically, the 2011 floods, which impacted vast areas of Thailand, cost the Thai economy an estimated $45 bn. This reduced GDP by roughly 3%, recording -0.8% growth in 2011, according to the World Bank. 90% of the costs fell to private industry, notably foreign investors in the critical automotive and electronic sectors. In all, more than 7,500 manufacturing plants were damaged, with production halted by companies such as Honda (HMC), Toyota (TM), Mazda (MZDAY.PK), Nissan (NSANY.OB), Mitsubishi (MMTOF.PK), Sony (SNE) and Nikon (NINOY.PK).
While the government has responded with plans to improve flood defenses, including raising $16bn in debt to fund infrastructure works, it seems that investors are reassessing Thailand as an offshoring manufacturing location. The Economist Intelligence Unit study indicates that by 2011 Thailand's share of inwards South East Asian FDI had fallen from 17% to just 6%.
Despite IMF estimates for Thailand's GDP annual growth for the next 5 years to remain in the 5%-plus range, the economy seems highly exposed to a shift in FDI. Thailand has a reduced cost advantage, less stable politics than previously, and demonstrated exposure to natural perils. According to the Bangkok Post, recent decisions by Samsung (SSNLF.PK) and Toshiba (TOSBF.PK) to locate research centers in India and Vietnam could represent the start of a trend by such firms to move out of Thailand.
Thailand also faces inflation concerns, with 2012/3 estimates of close to 4%. A further strain is the rising cost of government intervention in fuel costs. The Thai government subsidizes LNG and Diesel which is becoming an increasing drag on fiscal resources with rising global energy prices. The current cost of fuel subsidies is around 1.5% of GDP.
Demographics - Thailand itself offers a promising consumer market, with 40% of its population between the ages of 20 and 45. The economy is on the brink of maturing from an FDI driven manufacturing outsourcer to a mass consumption, knowledge- and technology-based service economy. Look to Singapore and Hong Kong for models of how this can work.
Following the Index - iShares Thailand ETF (THD)